Victoria, B.C. -- The prospect of ongoing exchange rate volatility and a weaker U.S. dollar by the end of 2009 is prompting wineries and foreign wine importers to seek ways of mitigating risk. The industry began to feel the impact late last year, said former Robert Mondavi executive Richard Carras, now a principal with Authentic Wine and Spirits Merchants in Vancouver, B.C.

Payments for wines that Authentic bought in mid-2008, when the U.S. dollar was trading near historic lows (and about par with Canada's dollar), came due last fall, following the credit crisis that effectively triggered a rise in the value of the U.S. dollar. Purchases suddenly became a lot more expensive, and remain so today, with the greenback currently trading in the range of about CAD$1.26.

"Any of our suppliers invoicing us in U.S. dollars will either have to reduce their margins, or we will have to raise their prices, which will hurt sales," Carras said at the time, anticipating a stronger U.S. dollar well into 2009.

But the volatility of exchange rates during the past six months also has added to challenges facing small U.S. wineries, said Mark Frey, vice president of foreign exchange trading with Currency House Ltd., a Victoria, B.C.-based company with annual revenues of more than CAD$85 million.

Swings in the market have seen exchange rates fluctuate between 25% and 35% in the last two years, he said. While the Canada-U.S. exchange rate is generally considered fairly valued right now, Custom House Currency Exchange Ltd expects the U.S. dollar to experience a moderate weakening this year ending 2009 at about CAD$1.20 or CAD$1.21 (conversely, Canada's dollar would be worth about US$0.83, up from the current rate of US$0.77).

"(It's) putting more price pressure on producers on both sides of the border," Frey told Wines & Vines. "So the big focus right now is on strategies and means by which they can mitigate that foreign exchange risk and remove that from the equation so they can plan for the coming financial year."

Strategies for mitigating the effect of exchange rate fluctuations include contracting for volumes of pertinent currencies in advance, and establishing thresholds for trades. An importer or other business benefitting from the current strength of its domestic currency might want to forward-contract for foreign currencies, Frey explained. An importer working with the U.S. dollar, for example, might want to contract for a given amount of Canada's dollar while the U.S. dollar is strong. The currency contracted for at today's rate could then be used to pay for imports in the future, when the rate might be less favorable.

"You could agree to, basically, the exchange rate today, and then use that exchange rate as part of your planning process to import product from these markets at the current exchange rate levels," Frey explained. "You know with 100% certainty what your costs are going to be with respect to importing that product."

A strong U.S. dollar makes exports of U.S. wines more expensive to foreign buyers, but a slide in the U.S. dollar wouldn't be a party, either. While sales paid for in foreign currencies would give U.S. companies more greenbacks, the purchasing power of the greenback in overseas markets would decline.

To handle both scenarios, Frey encouraged businesses to consider establishing thresholds to ensure that trades happen when they're to the business's advantage. This can lend discipline to transactions and assist in the management of cash flows.

U.S. wineries receiving payments in foreign currencies, and which anticipate a drop in the value of the U.S. dollar, might opt to schedule exchanges of payments when rates are favorable. A payment in Canadian dollars might be traded when the rate goes above US$0.80, for example (or a stop-trade order could prevent transactions if Canada's dollar drops to less than US$0.80).

Gregg Azzolina of Gregorio Wine Selections in Seattle imports wines from smaller producers in Italy, and he uses forward contracting because the wineries he works with prefer payment in euros. The fluctuations in exchange rates have made forward-contracting an important means of meeting the demands of foreign wineries, while minimizing his company's exposure to shifting exchange rates.

While he was hoping to make a transaction this week, today's drop in the U.S. dollar (it dropped by about 1.5 cents versus Canada's dollar, and 2 cents versus the euro) will prompt him to defer the trade in the hope of a stronger dollar tomorrow.

"It's a rollercoaster ride," he said. "Just when you think the dollar is getting better, we're out of the woods and you think it's time to trade, the dollar tanks again. So it's tough."